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CIS for subcontractors: why your invoice and your bank do not match

The first CIS payment catches people out in the same way every time. You invoice a figure, the contractor pays a smaller one, and nothing is wrong. Under the Construction Industry Scheme the contractor deducts tax from what they pay you and passes it to HMRC on your behalf. It is a payment on account against your own tax bill, not a discount and not a dispute.

This is general information, not tax advice. There are three rates: 20% if you are registered with HMRC under the scheme, 30% if the contractor could not verify you, and 0% if you hold gross payment status (Finance Act 2004, Part 3 Chapter 3). Which one applies to you is between you, HMRC and your accountant — but the difference between 20 and 30 is entirely about whether you are registered, and registering is free.

The split is the whole thing

The deduction applies to the labour element of what you invoice, not to materials. Which means the single most expensive habit in CIS work is lumping them together on one line. Materials that end up inside a labour figure get deducted from, and you have lent HMRC money you did not need to lend them until your return sorts it out — if anyone notices at all.

So the split has to happen where the work is recorded, not where the invoice is written. If the engineer books parts against the job as parts, the invoice comes out right by itself. If somebody reconstructs the job a fortnight later from a pad, it comes out however they guessed.

What a CIS invoice needs to show

• Labour and materials as separate lines.
• The gross figure before any deduction.
• The deduction itself, shown rather than implied.
• The net amount you expect to be paid.
• Your details as the contractor holds them — a mismatch here is a common reason for being deducted at a higher rate.

The reason to show all four figures rather than just the last one is that three different people need to agree on them: you, the contractor's accounts department, and your accountant at year end. An invoice that only shows the net leaves each of them working it out separately.

Keep the statements

The contractor should give you a payment and deduction statement. Those statements are what prove the tax was paid on your behalf, and they are what your accountant reconciles against at the end of the year. Kept in an email folder, half of them are missing by then. Kept against the job, they are still there.

If you are the contractor as well

Most firms of any size are both: deducted from on work they do for others, and deducting on work they subcontract out. Both sides need the same care, and the second one carries the obligation — verifying subcontractors and getting the rate right is your responsibility, not theirs. In practice: verify each new subcontractor online before the first payment and keep the verification number, deduct on the labour element only, file the CIS300 return by the 19th of each month, and hand the subcontractor a payment and deduction statement within 14 days of the tax month ending on the 5th.

It is not the only thing construction does differently to VAT

There is also a reverse charge on much construction work between VAT-registered businesses, which changes who accounts for the VAT. That is a separate question from CIS and it catches people separately — see the domestic reverse charge.